April 2013 Archives

In another example of sophisticated parties ignoring the obvious, the parties to an option contract fought over the implication of standard contract language which provided that the option contract was supported "by good and valid consideration" and thus enforceable.

In a somewhat complex case, the parties entered into an agreement whereby CamEquity would lend money to SVCare so that SVCare could purchase a business. In connection with that, a CamEquity related entity was granted an option to purchase 99.999% of SVCare for $100 million. That option agreement stated that the parties had exchanged "good and valuable consideration" to create a binding and enforceable contract. The loan agreement and option contract were executed the same day.

The day came when CamEquity sought to exercise its option. SVCare argued that CamEquity provided no consideration in exchange for the option right and the right was therefore void. Aside from arguing that the loan was itself consideration, CamEquity pointed to the contract language stating that it provided valid consideration for the option right. SVCare claimed the loan was never made and that the boilerplate recitation of consideration was not true.

The Court of Appeal found for CamEquity. In doing so, the court decided that the SVCare's attempt to introduce evidence to contradict the boilerplate consideration language--whether or not the $100 million loan was actually made--could not be considered by the court. Allowing that practice, in the face of a clear agreement negotiated and drafted by sophisticated parties, would undermine the stability and predictability of written agreements and create a setting where a party to a contract would question the ability to rely on the plain language of that contract. Because the option agreement "unambiguously provided that the mutually beneficial covenants constituted the consideration[, ] the importation of another obligation, such as a separate loan agreement," could not be allowed. The court addressed the highly sophisticated parties to the transactions noting that "had these sophisticated business entities, represented by counsel, intended to make the $100 million loan payment a condition of the enforceability of the option, they easily could have included a provision to that effect." Because the loan agreement was not even mentioned in the option agreement, the court refused to allow that issue to play any role in the option agreement's terms and enforceability.

Remarkably, the Court of Appeals considered a second case among these parties, also involving an option contract, and again enforced the boilerplate consideration language. And again the court stated that if the parties intended for a provision to apply, the documents would have clearly expressed that intention--"this is not the sort of term these sophisticated, counseled parties would have reasonably left out of the option agreement."

I realize that we do not know what took place when these agreements were signed. I also understand that hindsight is always 20-20. But understanding the implication of every contract provision--even among friendly parties--cannot be overstated. Failing to follow this rule can lead to a very expensive lesson.

A group of investors sued the Security and Exchanges Commission for failing to supervise Madoff and investigate complaints it received before the Madoff scandal unfolded. Despite finding that the SEC had dropped the ball, both before and during the investigation, the Second Circuit found the SEC, as an arm of the United States Government, immune from liability.

In discussing the laws covering this immunity, the court, citing others, stated that the immunity is not "about fairness, it 'is about power. . . [where] the sovereign 'reserves to itself the right to act without liability for misjudgment and carelessness in the formulation of policy.'" Therefore, despite the court's "sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct)" the immunity provided by Congress defeats plaintiffs' claims.

In almost any setting, when a borrower fails to pay a mortgage, the lender will issue a letter accelerating the entire amount owed notwithstanding that the terms of the mortgage only require monthly payments. That letter informs the borrower of the default and demands full payment of the amount outstanding. That letter is typically a prerequisite for the lender's filing of a foreclosure action but on the flip side, the lender's six year statute of limitations period begins from the date of that letter.

On August 20, 1992, Dime Savings Bank issued an acceleration letter to the borrowers. In September 1992, Dime commenced a foreclosure action. That action was dismissed but not on the merits of the case. The lender commenced a second lawsuit in April 1999. The court granted the borrowers' motion to dismiss as more than six years had passed from the date of the 1992 acceleration letter. The lender appealed claiming that the dismissal of the first case suspended the running of the statute limitations period.

The Second Department affirmed that dismissal finding that to stop the statute of limitations the lender must affirmatively revoke the acceleration. Because the earlier dismissal was not an affirmative act of revocation, the lender could not now seek payment of that loan.

The court noted that the lender had an opportunity to seek court permission to continue the first action shortly after it was dismissed but never did so. One wonders whether that played any role in the court's decision, as including that fact should not have been relevant to the court's decision.

The Silber Law Firm web site is published as a service to our clients, colleagues and others for informational purposes only. These materials should not be considered as, or as a substitute for, legal advice and they are not intended to nor do they create an attorney-client (or any other) relationship. Because the materials included here are only topical and general in nature, they may not apply to your individual legal or factual circumstances. You should not take (or refrain from taking) any action based on the information you obtain from this site without first obtaining professional counsel. You should not send us confidential information without first speaking to us and receiving explicit authorization to do so.